Investing to Stay Ahead of Inflation
Earning money is hard, and if you think your money isn’t going as far as it used to, you are not wrong. However, the increase in prices across the UK economy is real. Therefore, you need to understand what it means for you and take steps to stay ahead of inflation.
All of the below is for information only. Please always seek professional advice before acting.
So, what is inflation?
Inflation is a gradual hike in prices across an economy, and it is usually caused by an increase in consumer demand or production costs. This rise in prices is felt widely across goods and services, along with the products included in our weekly groceries and the energy we use at home. Therefore, it is called a rise in the cost of living.
The most common measurement of inflation rate in the UK is the Retail Price Index (RPI), which can be used to calculate such things as rail ticket prices or mobile phone contract prices. However, the different ways these indices track change in pricing and the items in the basket of goods can vary.
You must know that the Pound value does not follow inflation in the UK, which means that while the prices increase, your money falls behind in real terms.
How does inflation affect investments?
Effects of inflation can be negligible in the short term, but they significantly affect the real value of your money and investments over time. For instance, if you owned £10 twenty-one years ago, the goods you could have bought would now cost around £17.24 and this shows how its purchasing power has been decreased by 42% due to inflation, equal to 2.8% a year.
While inflation over the next twenty years may rise more slowly than it has in the past, a low inflation rate can build up or compound to erode the actual value of money over time unless you plan to beat it.
Let’s get to some serious business of investing our money to stay ahead of inflation.
Best Investments to Stay Ahead of Inflation
If you want to protect your wealth, you need to invest, keeping in mind inflation and selecting assets that can keep pace with rising prices naturally. Such assets mainly include real, tangible assets, or investments that can pay a variable interest rate and increase over time.
Unfortunately, you still can lose money because of inflation with a high-interest rate since high-interest rates are usually paired with high inflation rates. The Bank of England uses it as a tool to cool a steep rise in the cost of living. Let’s review some inflation-proof investments so you can protect your wealth.
Investments that are linked to the stock market have proven to beat the impact of inflation when held consistently and long-term, delivering returns ahead of prices, although past performances shouldn’t be a guide for future investments. As prices increase, the profits and revenues of the companies selling services and goods increase, raising both the value of their shares and, in some cases, the payments made to shareholders.
Some equities, especially those in specific sectors, have shown an even better record in terms of performance in the past and have usually outperformed the markets themselves. These growth stocks can provide even better opportunities for people looking to boost their wealth to stay ahead of inflation. However, fluctuations in the prices can mean they are high risk.
Real Estate (or property investments)
Real estate investment is a very common and popular option for investors because of its accurate and reliable nature. However, it can be a complicated asset because investors need a high initial cost. Therefore, retail investors can access property indirectly by collective property funds while gaining many of the advantages experienced by investment landlords.
Investing money in real estate can be an excellent choice to keep up with inflation due to investment returns and the asset involved in this investment. Usually, investors can benefit from the properties in two ways: rental income from the tenants and the increase in property value at the time of sale. Generally, the property's value has increased more than the inflation rate as the demand for the property increases, which also causes a cumulative effect on the rent that investors can generate. Such an increase in value makes property investment one of the best investments to keep up with inflation and a source of income generation in the long run.
In some recent years, investors have been facing some difficulties in gaining access to collective property funds. So you need to understand the restrictions and get advice from real estate experts.
Peer to Peer Lending
With rising inflation, unless you take some risks with your money, you might be losing money. However, while traditionally shares were thought of as the only way to seek higher returns, Peer to Peer lending has proven to become more popular among people wanting to earn profit without having to dip their toe in the stock market or property market.
For instance, Kuflink offers 7.2%* gross per annum for people who lend their money in Peer to Peer loans secured against UK Property*.
Furthermore, you can reduce the risk by diversifying your investments across loans using Pool products.
Bonds are usually considered safer and less profitable assets for investments. However, they can outperform inflation in the long run. In the last two decades, the interest by government bonds has maintained reasonable value compared to inflation. But, in recent years, bond yields have been lower, and they might not rise to the previous levels.
There are other types of bonds that provide high yields. However, the index-linked bonds usually provide an effective hedge against inflation in the long term. Index-linked bonds work because they offer variable interest rates that change with inflation, which is generally linked to an inflation index like CPI or RPI. But, keep in mind that these bonds are sensitive to change in interest rates and their prices fluctuate depending on the current economic outlook.
The word commodity is usually used for precious metals and raw materials such as timber, copper, and gold, which are used to produce goods worldwide. However, it can also be used for some consumables that include gas and energy. The price of commodities is highly influenced by the demand and production of commodities all over the world. Thus, we can say that it directly links the prices paid by consumers for services and products they need.
Commodities offer a great hedge against inflation and are useful to diversify investment portfolios. Thanks to the Exchange Traded Funds (ETFs), it is easier to track the price of different commodities accurately.
All Investments Are Not The Same
As we have described, there are some assets that can help you to overcome the effect of inflation but there are also many other ways to invest, and you should keep in mind that all investments do not behave in the same manner. All the investments have their benefits and drawbacks. It is essential to build a diversified investment portfolio to get the benefits of each investment while reducing the amount of risk on your capital.
Although investing for inflation is vital to grow your money and maintain its value, it should not out weigh your long term investment objectives. Of course, it is also imperative to hold an easily accessible cash buffer, but you should always have a clear objective and investment strategy in your priorities.
All of the above is for information only. Please always seek professional advice before acting.
*Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IF ISAs and SIPPs. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes. Please read our risk statement for full details.